How to Use a Non Compete Agreement

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1Analyzing Whether You Need an Agreement

2Drafting a Legal Non-Compete Agreement

3Enforcing a Non-Compete Agreement

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After training your employees, you may be afraid that they’ll jump ship to a competitor where they could use your trade secrets and business contacts. To protect yourself, you might ask the employee to sign a non-compete agreement. This agreement will prevent your employee from working for a competitor within a certain geographic area for a certain amount of time. A non-compete agreement is not appropriate in all employment situations. Accordingly, you should begin by analyzing whether you need one.

Steps

Part 1

Part 1 of 3:

Analyzing Whether You Need an Agreement

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   Check if your state enforces non-compete agreements. States generally disfavor non-compete agreement. These agreements are also illegal in some states, so you should find out if your state allows them before beginning to draft one.

   • Non-compete agreements are typically illegal in North Dakota. Additionally, they are effectively illegal in California except when selling a business.
   • Many other states provide exemptions for certain employees or limit non-compete agreements to “key” employees.
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   Determine if you need one. A non-compete agreement isn’t appropriate for every employee. In fact, they are only legal if you are protecting a legitimate business interest, such as trade secrets, relationships with customers, or goodwill.

   • A trade secret is any confidential information that gives your company an edge. For example, customer lists, customer preferences, and secret ingredients are trade secrets.
   • Goodwill includes your company’s reputation and other intangible aspects of the business, including its marketing position. If one of your employees works closely with customers, you may be afraid that they will lure away your customers if they work for a competitor.
   • Non-compete agreements are rarely appropriate for low-level employees who perform routine tasks. For example, your receptionist might talk to all of your customers, but they are unlikely to lure these customers away when they go work as a receptionist for a competitor.
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   Consult with an attorney. Using an invalid non-compete agreement is a waste of time and money, so you should consult with a lawyer if you have questions. You can find a business lawyer by contacting your local or state bar association and obtaining a referral.

   • Ask your lawyer to analyze whether you need a non-compete agreement. You will need to explain your employee’s job duties and what assets you are trying to protect.
   • The attorney can also help you draft the agreement if one is necessary.
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   Ask the employee to sign before working. A non-compete agreement must be supported with “consideration.” This means the employee must get something in return for signing the agreement. When an employee signs before starting work, the job itself can serve as consideration.

   • However, if you ask an employee to sign one after they start working, then you’ll need to give them something of value in return.
   • For example, you could promote the employee, give them more money, or change their status from “at will” to contract. Note that all contracts require so-called consideration, not just non-competes.
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   Use a non-compete agreement when buying a business. Typically, employers ask employees to sign non-compete agreements. However, you can also use one when buying a business from someone else. Ask the owners to sign a non-compete. This will typically limit their ability to start up a new business that directly competes against yours within a certain mileage radius.

   • Also have key employees sign the non-compete. They might move and start working with the people who sold you the business.
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Part 2

Part 2 of 3:

Drafting a Legal Non-Compete Agreement

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   Limit the duration of the agreement. A non-compete agreement cannot prohibit someone from working or sharing information into perpetuity. Instead, it must be reasonable. What qualifies as reasonable will differ depending on your industry and the job. For example, a New York court held that a two year limitation was invalid for Jimmy Johns sandwich makers.

   • Do some research to find what is reasonable. Look online and talk to other businesses in your industry. Ask for the length of their non-compete agreements.
   • Consult your local courts for examples of effectively enforced non-compete agreements.
   • You should also consult with a lawyer, who should understand the law in your state and can analyze the facts of your situation.
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   Restrict the geographic scope of the agreement. A non-compete agreement must also not restrict employment in an unreasonably large area. For example, you probably can’t prohibit someone from working anywhere else in the U.S. Instead, you must limit employment to a certain geographic zone based on where you are located.

   • What qualifies as “reasonable” will depend on the facts of the situation and your industry. Look into the legal precedent for more information. Generally, you can’t restrict an employee’s ability to work in an area where you don’t do business.
   • Some businesses are national. For example, a television network might want to restrict an anchor’s ability to work anywhere in the country. In that situation, a very broad geographic scope may be reasonable. However, very few businesses will be in that situation.
   • Courts generally analyze scope in conjunction with duration. For example, a broad geographic limitation might be okay if it is really short.
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   Prohibit only certain jobs. Non-compete agreements cannot broadly prohibit all work. For example, someone who ran a laboratory might quit in order to work as a bookstore manager. It’s not reasonable to restrict their ability to take that job. Instead, your restrictions must be reasonably related to your protectable interest as a business.

   • A lab might have trade secrets you want to protect. Accordingly, you should only limit an employee’s ability to work a job where they may use those secrets. This might be certain positions at a competitor’s lab.
   • In some states, it’s unreasonable to completely prohibit someone from working in a field or profession, and courts won’t enforce broad non-compete agreements.
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   Include an assignment provision. You might sell your business. Any buyer will probably want to acquire a non-compete agreement. However, some states won’t let you transfer the non-compete unless the employee consents. You can avoid any problems by including an assignment provision in the agreement.

   • A sample assignment provision might read: “Employee agrees that this agreement will continue in effect if Employer should sell substantially all of the Company’s assets to another owner.”
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   Add a choice of law provision. If there’s a dispute, a judge will need to use a state’s law to analyze the agreement and provide a remedy for violations. Generally, the law of the state where you are located will be applied. However, if you do business in more than one state, you can choose which state’s law will apply. This is called a “choice of law” provision.

   • Consult with your attorney about which state’s law you should choose. Not all states interpret non-compete agreements the same way. What is legal in one state might not be legal in others.
   • Also states afford different remedies when an employee violates the agreement. You want to choose a state whose law gives you the most protection.
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   Talk with a lawyer about other ways to protect your business. A non-compete provides some protection to employers. However, you’ll probably also want a non-disclosure agreement to protect trade secrets and client lists.

   • Be as specific as possible about the prohibited activity in your agreement. For example, if the employee in question worked as a sales manager, it may be more effective to restrict her from acting in a sales role, rather than restricting her from working for a competitor at all. A good non-compete agreement will clearly define the restricted activity, the terms, and the duration of the agreement.
   • Often the viability of non-compete agreements is judged based on whether or not they are in the public interest.
   • Also discuss whether you need a non-solicitation agreement. With this agreement, the employee agrees not to solicit your customers should they leave the company.
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Part 3

Part 3 of 3:

Enforcing a Non-Compete Agreement

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   Determine why the employee left. You can typically enforce a non-compete agreement when an employee quits, but it is not cut-and-dry. If you fired the employee, then things can become complicated. You’ll want to consult with a lawyer to discuss whether you can enforce the agreement. This may vary based on where you’re located.

   • If you fired someone, the non-compete agreement should address termination. It should give you the right to enforce the agreement even if you fire the employee.
   • However, if you fired someone for an illegal reason—such as discrimination or because you wanted the employee to break the law—then you can’t enforce the agreement.
   • When you fire an employee for “fault”—such as poor attendance or inadequate performance—then you might be able to enforce the agreement. Nevertheless, some courts might not be eager to do so.
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   Decide if the employee has violated the agreement. Look at the employment your former employee has secured. Now analyze your non-compete agreement and see if the employee is violating their agreement. Not all new employment will violate the agreement, and you don’t want to sue when you don’t have a valid reason for doing so.

   • Discuss this with your attorney, who can analyze whether the new employment truly runs afoul of the non-compete agreement.
   • Also talk about whether your non-compete agreement is enforceable. You might not know what is in the agreement because it might have been assigned to you when you bought the business. Courts won’t enforce an illegal contract, so make sure the terms of the non-compete are legal.
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   File for an injunction. You enforce a non-compete agreement by asking a court for an injunction. Your lawyer will file forms with the court and serve a copy on the former employee. Your lawyer will also request a hearing, which should happen soon.

   • While you pursue an injunction, you may be able to obtain a “restraining order” as a temporary measure to bring immediate relief.
   • You may also sue for “liquidated damages,” which is basically a penalty the employee agreed to pay when they signed the non-compete agreement. Liquidated damages must be reasonable, so don’t expect to soak your former employee. Note that it will be hard to get liquidated damages if it’s not in your original non-compete agreement.
   • You can also seek “actual damages,” which are provable financial losses caused by your former employee’s conduct. For example, if the employee took your customer list and gave it to a new employer, you might be able to get money compensation for the lost customers.
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   Attend a hearing. The judge will hold a hearing to decide whether to issue a temporary order. Your lawyer will need to show that you will be irreparably harmed if the former employee is allowed to work for a competitor. After the hearing, the judge might set a date for a lengthier trial.

   • In some states, you might only attend one hearing, where the judge will decide the issue without a trial. Talk to your lawyer about the specific process in your state.
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Tips

• Update your agreement. States might change their laws, or your business can change. Accordingly, you should periodically review your non-compete agreements and update them if necessary.
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